On January 1, 2021, The Barrett Company purchased merchandise from a supplier. Payment was a noninterest-bearing note requiring five annual payments of $38,000 on each December 31 beginning on December 31, 2021, and a lump-sum payment of $280,000 on December 31, 2025. A 10% interest rate properly reflects the time value of money in this situation. ((FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: Calculate the amount at which Barrett should record the note payable and corresponding merchandise purchased on January 1, 2021.

The Barrett Company

Amount to record the note payable and merchandise purchase on January 1, 2021:

= $294,340

Explanation:

a) Calculation of Present Value of Future Cash Outflows by January 1, 2021:

1. Dec. 31, 2024, present value of $38,000 annuity for 4 years = $38,000 x 3.170 = $120,460

2. Dec. 31, 2025, present value of $280,000 for 5 years = $280,000 x 0.621 = $173,880

Total payment = $294,340 ($120,460 + 173,880)

b) The present value of $38,000 as an annuity lasting 4 years is calculated using the annuity factor of 3.170 at 10% interest rate.

c) The present value of $280,000 after 5 years is calculated using the discount factor of 0.621 at 10% interest rate.

d) These produce a value when added that gives the amount at which the note payable and corresponding merchandise purchased on January 1, 2021 by the Barrett Company should be recorded.

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